As the world continues to grapple with the urgent challenge of climate change, organizations of all types and sizes have a crucial role to play. As mentioned in the previous post, one powerful tool that can help organizations reduce their carbon footprint is the voluntary carbon market. Today, we take a closer look at the formation of the price and the current state of the market.

The value formation of carbon credits is primarily derived from the carbon principles that we went over in our article on the voluntary carbon market, with the key one being additionality. However, there some additional characteristics also influence the price significantly:

Characteristics of Carbon Credits — Project Type
Currently, forestry projects, especially through the REDD+ protocol, are by far the most popular and account for about 90% of the total issuance of credits for 2022. However, that was not always the case. As you recall from the previous post, between 2015 and 2017, renewable energy was the most discussed project type on the voluntary market. But, due to that, two of the biggest certifying agencies, Verra and Gold Standard, stopped accepting new renewable energy projects at the end of 2019, and the prices for renewable energy projects decreased and remain lower than forestry projects.

Vintage Period
The vintage period refers to when the carbon offset by the carbon credit took place. The rule of thumb is that the older the offset, the cheaper it is. In 2022, the most traded vintage year by volume was 2020, whilst no significant volume of trades for credits issued in 2017 and earlier. There is also a market to buy carbon credits with offsets in the future that works exactly like a regular futures market would.

Standard

The different standards, as discussed previously, create the project types or methodologies. Currently, Verra’s VCS (Verified Carbon Standard), and especially their CCB subdivision (Climate, Community and Biodiversity), account for most of the traded carbon credits. Despite the standard having some effect on the price, it’s often overshadowed by the main attributes of the project, such as the presence of co-benefits (CCB, UN Sustainable Development Goals, CORSIA) and the total volume of reductions (supply) achieved within the standard, and not the better qualities of the standards as such.

Project Geography

Currently, projects in Africa, India, and other countries in West Asia account for most carbon credits. However, the African projects’ credits cost about 90% more since most of them are forestry projects that are in all-time high demand, whereas other types of projects are dominant in Asia.

American buyers prefer local credits, while other countries mainly purchased credits in Peru, Brazil, and India. This is because, unlike the USA, European buyers generally do not have the opportunity to "buy local" on voluntary markets since the European Union Emissions Trading System (EU ETS) already regulates many sectors.

How much is a carbon credit worth across various industries?

Economic pressures and greenwashing activities have also influenced carbon credit value formation.

We may look at current trends as we now understand the main components making up the price. In recent years, the voluntary carbon market has faced challenges, such as the significant decrease in prices for voluntary credits in 2022 due to political instability, inflation, and rising energy prices. This has put pressure on the market, and given that 2023 has a high probability of recession, prices may remain under pressure.

Additionally, the voluntary carbon market faces the challenge of greenwashing, where organizations make misleading claims about their environmental impact or sustainability practices. This can undermine the effectiveness of the voluntary carbon market and erode public trust in carbon reduction initiatives.

Combined with the fact that the voluntary carbon market had a sensational year in 2021, where trades skyrocketed from 11 million transactions in 2020 to about 50 million in 2021, reaching a market capitalization of over a billion dollars, 2022 was destined for a heavy decrease. Trades fell two-fold compared to 2020, and the year ended with 5 million transactions being recorded.

However, the future is still bright for the voluntary carbon market’s role in reducing carbon footprint.

Despite these challenges, analysts believe the voluntary carbon market will play a crucial role in the energy transition. As more organizations become aware of their carbon footprint, the demand for voluntary carbon credits is expected to grow. This, in turn, will drive the development of new carbon reduction projects and help to accelerate the transition to a low-carbon economy. Furthermore, the average price of trades still grew from $5.86 to $11.9 from 2021 to 2022, representing the higher quality of the carbon credits remaining on the market.

To ensure the success of voluntary carbon markets, transparency and standardization are key. Regulations are needed to make the market more transparent and standardized and eliminate greenwashing. By establishing clear rules and guidelines, regulators can help to build public trust in the market and increase the demand for voluntary carbon credits.

Voluntary carbon markets can play an important role in helping organizations reduce their carbon footprint and battle climate change. Despite the challenges they face, it's clear that the demand for carbon reduction solutions will only continue to grow. So if your organization is looking for a practical way to make a difference in the fight against climate change, consider supporting the voluntary carbon market. By doing so, you can help build a more sustainable future for your organization and society as a whole.